Richard Branson denounces DfT for accepting FirstGroup rail bid

Virgin Rail head claims department is being taken for a ride by rival's 'preposterous' sum for lucrative west coast rail franchise

Sir Richard Branson at Westminster on 10 September after giving evidence to the transport committee on the award of the west coast main line franchise to FirstGroup. Photograph: Will Ollver/AFP/Getty Images

Monday 10 September 2012 15.17 EDT
First published on Monday 10 September 2012 15.17 EDT

Sir Richard Branson has accused the government of failing to follow its own rules by accepting an "absolutely preposterous" bid from FirstGroup to run the west coast railway.

In a parliamentary showdown between the head of Virgin and rivals from British railways, Branson told the transport select committee inquiry that awarding the west coast main line franchise to FirstGroup was like "renting out your house to the one who offers to pay twice the rent in 10 years' time [despite] being burnt three times already".

However, Tim O'Toole, chief executive of FirstGroup, accused Virgin of peddling "outrageous" versions of history, and of making guesses about a bid they had not seen.

The government last month announced it had awarded FirstGroup the rights to the west coast main line, one of Britain's most lucrative rail franchises.

However, Virgin applied for a judicial review hours before the signing of the contract on 28 August.

City analysts and the RMT union have joined Virgin in querying FirstGroup's bid.

Branson, who has run the route since 1997, claims the sums mean FirstGroup will follow National Express and GNER in not seeing out the franchise commitments.

In a furious attack on the Department for Transport, Branson said officials had been taken for a ride by the bid: "They've thrown this enormous cheque at the end of the franchise and somehow got away with it."

Branson said Virgin had spent £50m on four failed franchise bids, twice losing out on the east coast line when the winners eventually failed to honour their contracts.

He said: "At some point you have to draw a line. We'd much rather the DfT was open and transparent, and then we wouldn't have to go to court."

FirstGroup, the UK's largest rail operator, bid a basic £5.5bn to run the line until 2026. The sum was £700m more than Virgin offered. With a likely extension and inflation, the difference rises to £1bn-£2bn.

Virgin's lawsuit claims that the DfT's procurement process did not correctly assess the risk of FirstGroup defaulting, with guarantees far below the premiums it would have to otherwise pay.

But O'Toole described Virgin's allegations as "flat-out wrong" and "just another guess they have made about our bid". Later he promised: "The rent is coming in regular instalments."

He said the larger sums were due to compounding growing passenger numbers and revenues in the last years of the franchise, where Virgin was predicting flat growth. He said: "Even with a railway stuffed to the gills like Great Western you can achieve growth."

He hit back at Virgin's comparison with the previous east coast debacle, saying: "The most outrageous thing is the history Virgin presented. Virgin would have been crushed, it would have defaulted [had it won the franchise]."

He denied excessive risk in FirstGroup's current bid, but said: "This will require a lot of hard work. There is always risk. We just think we will be able to handle it."

It emerged in the hearing that the DfT had demanded a greater surety from FirstGroup, pushing up the bond from £50m and settling on £200m, although at one point FirstGroup had offered £15m more.

A Virgin spokesman said the DfT needed be "upfront about these last-minute, behind the scenes, negotiations with taxpayers' money".

The DfT said it was unable to confirm any negotiations which were confidential and the subject of legal proceedings.

A spokesman said: "The department was involved in active dialogue with all bidders about the details of their proposals."

The department has said it would increase its focus on contingency planning in case Virgin's legal action meant FirstGroup could not take over the franchise on 9 December.

One option was taking the line into state control in the interim. Directly Operated Railways, the government company now running the east coast line, was reported to be looking at the running of the line.

Branson reiterated his offer on Monday to continue to ing running run services for free pending the high court's legal decision. But the DfT was not thought to be keen.

Speaking afterwards, O'Toole said he had met west coast railway staff and that FirstGroup was pressing ahead for the change of ownership on deadline. "The only fact you know is, no matter what happens Virgin is leaving on 9 December."